Key’s tax speech

Good summaries here and here.  Speech is found here.

There was nothing in the speech (when it comes to tax – which is the sole focus of this post).  An increase in GST was already very likely – but the government wouldn’t even commit to it.  Given that it isn’t going to be finalised in size or scope until the May budget, and given that the they want to compensate by changing tax rates it is likely they won’t introduce this until March/April 2011.

Note:  I’ve heard rumours they would change GST in October.  Increasing GST just before Christmas, with no compensation, and coming out of a recession with elevated unemployment is what I would term moronic.  As a result, it can’t be ruled out ;-)

No land tax, no capital gains tax, probably some fiddling around depreciation rules (although that wasn’t even pointed at in the speech), all implies that the government isn’t really that serious about ensuring property is treated the same as other capital investment.

I heard today that we were going to hear about “significant changes to the tax system”, something about a “step change”.  Other than the possibility of a slight shift from income to consumption taxes there was nothing in this speech.  To be honest, it makes me laugh a little :P

Update:  The more I think about it, the more this speech implied a STEP BACK from the MINOR adjustments that everyone already expected.

No mention of LAQC’s, no mention of changes to the treatment of depreciation on property, no commitment to a GST rate change, no aims to flatten the income tax scale per see (as the higher GST would be fully compensated).

A lot of (waffly) talk about investment and minor fiddles with benefits – which aren’t the purpose of this post, but which indicates how tax reform DOESN’T HAVE A PRIORITY in terms of the governments thinking.

In reality this speech has shown that this government is less willing to change issues that have been illustrated with the tax system then we believed before the speech.  That was a surprise, given how little was expected in the first place ;-)

Update 2:  So it wasn’t a “major economic reform” in the tax sense.  But yesterday he did say:

Mr Key said the details of any changes would not be revealed before the Budget in May, but his speech would spell out the Government’s overall economic programme for the year.

That isn’t as bad.  The speech didn’t have any details, that is true.  However, it didn’t really spell out much in terms of tax changes either.

When it is put in this context it feels like there wasn’t supposed to be much too it – so I don’t feel as bad about it as I did.  However, there are two major negatives still:

  1. it means we will have to wait until May until we have any sort of “certainty” around tax policy – that is not a good thing for the economy.
  2. The things I said above still hold – expectations of tax change are now lower than they were, and the things that weren’t mentioned will be analysed as much as the things that were!  As a result, this increases uncertainty MORE, as well as indicating that any changes may be smaller than the policy changes suggested by specialists.

Update 3:  For those who are interested in the wider social policy discussions, opinions, and other tax stuff look:

Offsetting Behaviour, Brad Taylor, Public Address (1 and 2), The Standard, Homepaddock, Education Directions, Colin Espiner, Dim Post (and 2), Not PC, Gonzo.

Also everyone else is grading it so I better.  C+ for catching an increase in GST and not putting in a tax free threshold.  However, it loses marks for creating uncertainty and not balancing expectations – both serious issues with such a speech (and really polices in general).

  • http://offsettingbehaviour.blogspot.com/ Eric Crampton

    As you know, I’m no fan of land taxes for public choice reasons. But I’d at least hoped he’d show some kahunas on other dimensions. Any kind of signal of commitment to reform would be welcome at this point. Doubt we’ll even get anything fixing WFF marginal tax rates. What a disappointment.

  • steve

    maybe he’ll make English the bad guy come budget day. probably unlikely.

    I agree, not the exciting “step change” we were all expecting.

  • http://www.tvhe.co.nz Matt Nolan

    @Eric Crampton

    He directly ruled out changes to WFF (except for any “required” price-level adjustment following a change in the GST rate).

    EMTR’s are unchanged is something he almost blatantly said. In fact, they are likely to be higher – as changing from a GST rate from an income rate removes the wedge in the credit market, which implies (in a static sense – which is what matters for the near term goal of fiscal neutrality) you need a higher base rate of tax on all other income. However, this might get covered by any tax on “depreciation” who knows.

    At least they didn’t mention a “zero tax” threshold. Hate those things, great way to get your EMTR’s up for sure.

  • http://www.tvhe.co.nz Matt Nolan

    @steve

    The thing is, I didn’t really expect “much”. But there was less than expected.

    And the term “step change” didn’t turn up until Key mentioned it!!! He said there was going to be significant change – why create expectations then waffle.

    That is why I have to laugh :D

  • http://offsettingbehaviour.blogspot.com/ Eric Crampton

    He has zero room to do anything worthwhile on income taxes with a two and a half point increase in GST and no other changes. If he’d put GST up to 20%, my ears would have perked up a lot. What a waste.

  • http://www.tvhe.co.nz Matt Nolan

    @Eric Crampton

    Two and a half point, at MAX – so could be less, could be zero.

    I get the feeling there is a large “anti-GST lift” crowd inside the public service. As they advise the government it would explain why Key thought this pointless speech was actually radical …

    However, what do you expect from a public service that has been indoctrinated with that c**p from Cullen that there is “no trade-off between equity and efficiency”. That makes me … unhappy.

  • Stephen Whittington

    I can’t figure out if what politicians can do is strictly constrained by public opinion, and that I live in a country which likes big Government, or if National are just wimps.

  • http://www.tvhe.co.nz Matt Nolan

    @Stephen Whittington

    “I can’t figure out if what politicians can do is strictly constrained by public opinion, and that I live in a country which likes big Government, or if National are just wimps.”

    There is a little bit of the first part. However, I’m definitely feeling quite a bit of the wimp explanation as well ;-)

    Why did National get all these working groups out there, if they were just going to say “we are too scared to do anything”.

    Now, I have no problem with policy not changing, if that is what society wants. However, the rhetoric of the government and its actions are very different – this is what confuses me. If society seems to be supportive of the rhetoric, then why don’t we see corresponding changes in policy?

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  • deserthead

    I thought Key explicitly ruled out any changes to Poverty Traps for Families before the election (along with any state-asset sales).

    The TWG report indicates that raising GST, removing depreciation on buildings and getting rid of the 20% depreciation loading would raise around (1.9+1.3+0.3)=$3.5bn. It also says that aligning income-trust-company rates at 30-30-30 would cost $1.6bn.

    Key mentioned across the board income tax reductions didn’t he? Can anyone calculate how much reduction is possible in the lower and middle tax rates for 1.9bn?

  • Red Rosa

    Difficult to see the net effect of all these ‘signals’. There seems to be very little concrete.

    I think the average voter is going to grasp the ‘tax cuts for the high incomes’ and ‘increased GST’ though. Does one balance the other?

    And small time property investors, of which there are thousands, will certainly be hit. Is this take, which does seem clear enough, be a net gain to the tax haul?

    When all the dust has cleared, will the few big winners be the few high income earners?

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  • http://www.tvhe.co.nz rauparaha

    @Matt Nolan
    “However, the rhetoric of the government and its actions are very different – this is what confuses me.”

    I think that you’re imputing too much to the rhetoric. My impression from talking to non-economists yesterday is that they think raising GST by 2.5% IS a big change in policy. Perhaps our perception of a ‘step change’ is systematically different from the rest of the population’s.

  • http://www.tvhe.co.nz Matt Nolan

    I suspect that an increase in GST by 2.5 points feels like a big deal to people because the government hasn’t explained how the countervailing changes in the tax system work. Increasing GST by 2.5 points and cutting all income tax rates (and lifting entitlements) gives a very similar tax system – infact it is almost exactly the same when interest income is excluded and we have a magical economy with no credit constraints ;-)

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  • http://www.tvhe.co.nz rauparaha

    @Matt Nolan
    That answer is exactly why I think you systematically differ from the rest of the country in your perception of a ‘step change’ :)

  • http://www.tvhe.co.nz Matt Nolan

    @rauparaha

    I wouldn’t say “rest of the country”.

    Furthermore, if the problem is one of framing then I would say “the rhetoric of the government and its actions are very different – this is what confuses me”, again.

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  • http://www.freebeat.info buddy thomas

    as always the rich get richer….

  • http://www.tvhe.co.nz Matt Nolan
  • Tim Smyth

    It seems like the real fundamental question is whether New Zealand wants the same tax system as Hong Kong and Singapore. Basically both personal and corporate income tax rates in the high teens, no capital gains, plus land tax between 10 and 15 percent, plus GST in the case of Singapore. I don’t see how you get to this system without land tax. On the otherhand if you really want to shake up the NZ economy becoming more like Singapore and Hong Kong is the way to do it. Lowering corporate taxes to 25% would only put NZ in the same realm as Canada and the Netherlands along with UK possibly with George Osbourne as Chancellor. All three of the previously mentioned countries are all far closer to major world population centers. I would say not having capital gains tax in NZ does put it in a fairly unique position in the world.

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  • http://www.imbrandon.com lonewolf

    as always the rich get richer….

    & the poor gets poorer